As you may be aware the Financial Ombudsman Service ("FOS") periodically release and update documents to assist both consumers and Financial Service Providers ("FSPs") in how they come to the decisions that they do.
This month we have reviewed and re-produced an extract from the FOS Approach to Early Release of Superannuation which you can read below:
2.1 Grounds for Early Release of Superannuation
There are limited circumstances in which a person may apply for their superannuation to be released early to help meet their loan obligations. These are:
Severe Financial Hardship
A person who has received an eligible government support payment continuously for 26 weeks may be entitled to an early release of superannuation on the grounds of several financial hardship. On this basis, a person may access up to $10,000 once a year. To do so, they must obtain a supporting letter from DHS and then apply directly to their superannuation fund. The payment can be used for any purpose and the FSP's support is not required.
Compassionate Grounds for Mortgage Assistance
A person can apply for early release of superannuation on specific compassionate grounds. One of these is mortgage assistance to prevent the foreclosure of a mortgage, or the exercise of a mortgagee's power of sale over the person's principle place of residence. This process is administered by DHS. Foreclosure is rate, so this article focuses on the power of sale.
DHS may approve the release only if the borrower provides a written statement from the mortgagee that:
- A payment of an amount is overdue; and
- If the person fails to pay the amount, the mortgagee will:
Foreclose the mortgage on the person's principle place of residence or
Exercise its power of sale of the person's principle place of residence.
A limit applies such that in each 12 month period, DHS may approve the release of an amount of a person's preserved benefits in a superannuation entity only where that amount does not exceed 3 months of repayments plus 12 months' interest on the outstanding loan balance.
An amount released on the compassion grounds of mortgage assistance is taxed as a normal superannuation lump sum, which means there will often be tax implications for the borrower.
2.2 What FOS Expects of FSPs
We expect FSPs to genuinely consider requests for financial difficulty assistance. Wven where a borrower is asking only that the FSP support the request for release, the FSP must be willing to consider alternatives. This is because supporting a release is an option of last resort - in many cases more appropriate options may be available if the parties work together.
To meet its financial difficulty obligations, we expect an FSP to:
- Take appropriate steps to understand the borrower's financial position, and how their position may change in the future
- Consider the borrower's request as well as any reasonable alternatives that may help the borrower
- Decide what assistance it will provide to help the borrower (this decision should be reasonable and based on legitimate considerations)
- Communicate its decision to the borrower and, if it declines the borrower's request, provide reasons.
An FSP following the above guidance should consistently meet its obligations.
2.3 Factors for FSPs to Consider
When considering whether to support a borrower's request for early release of superannuation:
- FSPs cannot insist that a borrower apply for early release of superannuation to repay outstanding arrears (for example, clause 28.9(a) of the Code of Banking Practice states: We will not require you to apply for early release of your superannuation benefits to repay the whole or any part of your credit facility with us).
- FSPs should explore alternative options with the borrower.
- If it is apparent that the borrower can afford ongoing repayments but cannot clear the arrears on the loan, it may be more appropriate for FSPs to capitalise the arrears. This will resolve the arrears on the loan as well as preserve the borrower's superannuation balance.
- Where it is uncertain whether a borrower may be able to meet their loan obligations, it may be more appropriate for FSPs to offer a serviceability test or a reasonable repayment moratorium to allow time for the borrower's situation to improve.
- If it is clear that the borrower cannot meet their long-term obligations, support a superannuation release is unlikely to be appropriate. This is because the release will merely delay inevitable default. The borrower is still likely to lose their home, and will also have lost part of their superannuation. In these cases, FSPs should consider alternatives such as offering time to sell the security property.
- Where superannuation releases have been tried and not helped to relieve the borrower's financial difficulty, FSPs should exercise greater diligence before supporting further applications for release.
It is never certain that a borrower will be successful in their application to DHS. This means that even when an FSP decides to support a superannuation release, it needs to consider what assistance it can provide if the borrower's application is unsuccessful. This might include offering time to sell the security property.
2.4 Where an FSP Does Not Meet Its Obligations
Where we consider that an FSP has not met it's obligations, the usual remedies apply for a failure to meet financial difficulty obligations under the FOS Terms of Reference. This often includes compensation for non-financial loss. The borrower may also have suffered financial loss for which we would award compensation.
If an FSP has supported a release of superannuation that we considered inappropriate, we will generally not require an FSP to refund the superannuation amounts received, or reimburse any tax paid by the borrower as a result of the withdrawal of those funds. This is because, in most cases, the borrower will have obtained the benefit of the funds and will have saved interest and fees on the loan.
In our experience in dealing with mortgagee sales at LCollect we have found that it was not appropriate for the FSP to support an early release of superannuation because better alternatives were available or it was unlikely that any such release would assist the borrower in overcoming their financial difficulty. In almost all instances, where a FSP declined to support a release, we found that decision was appropriate.
Source: The FOS Approach to Early Release of Superannuation
Note: Please note that this article does not constitute legal advice. If in doubt you should seek your own proper, independent legal advice.